Progressive Distributor - The gospel of standardization

Monte Legro, Texas Mill Supply The gospel of standardization

Texas Mill Supply spreads the message of product standardization and other cost-saving methods to manufacturers and contractors in the heavy processing industry.

by Richard Vurva

Most distributors who say they’re niche players define themselves by the products they sell. For example, it’s common for distributors to describe their companies as cutting tool specialists, hose and accessories distributors or safety specialists.

Texas Mill Supply (TMS), headquartered near Houston, is a niche player of a different kind.

“Our focus is basically in an industry niche,” says president Monte Legro. With annual sales of more than $150 million, about 80 percent of the company’s business comes from customers in the heavy processing industries, including petrochemicals, public utilities, offshore oil and gas, plus pulp-, paper- and food- processing facilities.

“My view is that the advantages of leveraging our inventories, our services and our capabilities to a particular set of customer needs is easier than letting products define our market,” Legro says. “We do a better job and are able to be more efficient if we don’t try to be all things to all people.”

Boyd Noble, vice president of national accounts, explains how TMS leverages expertise in its niche market: “We manage about 600,000 line items of data for various clients.”

Regularly analyzing the data results in better buying decisions, which benefits customers and TMS.

For example, while experiencing a 15 percent growth rate in sales over each of the past two years, the company maintains 10,000 fewer SKUs in inventory today than it did three years ago. How can it achieve more sales and reduce inventory at the same time?

Product standardization
Specializing in the heavy processing industries enables TMS to build an extensive database for tracking product usage within specific industries by SIC code.

Why is that important? Distributors that specialize in cutting tools, for example, need to maintain inventories that span industries as far flung as mom-and-pop steel fabricators to major automotive assembly plants. There may be little, if any, crossover. By primarily serving one type of industry, TMS stocks only those cutting tool products used in that industry.

The standardization message also garners attention from product manufacturers. Suppliers take note when they receive word that a major oil company or a national contractor that serves the oil patch plans to select a single grinding wheel to spec into multiple locations.

The strategy has helped TMS expand from its traditional Texas base to a presence in 14 states in the South, East and Midwest.

Five ways to cut costs through integrated supply
There are five primary ways for customers to save money through integrated supply, according to Boyd Noble, vice president of national accounts for Texas Mill Supply.

1) Inventory reduction. Go into any large processing plant and you’re likely to find between $10 million and $30 million in excess inventory tucked away in storerooms, tool cribs, work benches and lockers. Most is classified as spare parts and critical spares, and much of it is obsolete. “We look at what we can buy back from a customer, return to the manufacturer or sell to someone else in order to reduce the customer’s inventory holding costs,” Noble says.

2) Transaction reduction. With most plants, the actual MRO spend probably represents 1 percent to 2 percent of their total spend. But in terms of their transaction costs, it’s 60 to 80 percent. Streamlining the procurement process by utilizing on-site personnel, auto replenishment systems, EDI, bar-code processing and other technologies can drastically lower transaction costs. “Our programs will typically reduce purchase orders and invoice processing costs by 50 percent or more,” he says.

3) Manpower reallocation. “We have 137 people dedicated to on-site programs, either full-time or part-time,” says Wes Towles, manager of the Houston branch. By letting Texas Mill Supply focus on materials management, run the customer’s warehouse and distribute products to end-users, it allows the customer to allocate staff for other functions.

4) Product standardization. Why use 30 different brands of gloves when one or two will suffice? “We say to customers that we can get them down to one or two brands that will cover all their needs,” Noble says. “Then we do an estimated savings projection and present it to the client. That shows how much the client spent last year, and how much the client could save next year by standardizing on one brand.”

5) Pricing. Product standardization reaps greater buying power, which shows up in the product price. Since most integrated supply contracts are priced using a cost-plus pricing method, customers can be confident that they’re paying a fair price. “And since inside salespeople no longer have to thumb through page after page of catalogs and calculate price discounts, it reduces our costs as well,” Noble says.

Texas Mill Supply believes strongly in the advantages of product standardization. In fact, it’s one of five cost-saving tenets of its integrated supply program (see sidebar at right).

“We build a standardized source catalog for anything we buy for anyone,” says Legro. “If we buy one item for one customer, most likely some other customer in a similar business will need the same item some other time.”

So sourcing, traditionally a time-consuming process for an inside salesperson, becomes automated. And buyers gain the efficiencies of scale that accompany larger purchases.

Spreading the word
TMS further leverages its knowledge about customer buying habits by spreading the gospel of standardization to contractors who do business with major processing industry customers. In addition to the benefits achieved when a chemical plant standardizes on a single brand across all of its plant locations, the company can achieve further gains by urging contractors who work in those plants to standardize on the same products.

“We’ve increased the amount of business we do for the large industrial contractor where we utilize the same tools used in large plants,” Legro says. “We can provide the same efficiencies to large contractors that we do for large plants.”

TMS recently expanded its integrated supply management capabilities to include services tailored to contractors that serve the heavy processing industry. In many cases, those firms — ranging from contractors hired by a chemical plant for a major capital expansion to companies that perform maintenance services — have not been as quick to adopt best practices that are becoming commonplace in manufacturing facilities. That is changing, however.

“Contractors have typically been a little slower than some of our other clients to embrace some of these new concepts,” says Noble.

But product standardization is catching on among contractors because if they have something left over from one job, rather than trashing it because it doesn’t match another job, it’s reusable.

“That gives them a lot of efficiency. Like everyone else, they’re being pressed to reduce costs and be more efficient,” says Bill Herrington, vice president of operations.

Contractors are looking for the same cost savings the petrochemical industry experienced through integrated supply programs.

“A lot of times people perceive contractors as employing the three bids in a cloud of dust mentality,” Legro says. “But they are also looking at total acquisition costs. When you take the price of the item and you add the transaction costs, getting three bids is a highly inefficient activity. You need to automate the process. We’re seeing a lot of process automation and direct flow of commodity items into the contractor’s world.”

On-site tool storage
The cost-savings message TMS preaches to contractors is slightly different from the message given to industrial plants.

“A contractor’s biggest concern is surplus material,” says Boyd. “A plant’s biggest concern is total inventory over a period of time. It is different. The contractor is here today and gone tomorrow. They don’t want millions of dollars in surplus inventory left over.”

To address that concern, TMS places trailers on construction sites for tool storage, tailored to the specific needs of that job or that area of the plant. An automatic replenishment process ensures the right mix of tools for the job.

“We’ll get a standardized list of materials and set those up in a database,” says Wes Towles, Houston branch manager. “We’ll create bar-code bin labels and put them on shelving units in those containers and then we’ll send someone out there once a week, twice a week or every day, depending on how much activity is going on in that trailer. We automatically replenish it.”

The contractor doesn’t have to devote personnel to purchasing tasks such as writing requisitions, checking inventory levels, matching shipments to packing slips to make sure they received what they ordered and various other labor-intensive clerical tasks. Relying once again on its extensive database of product usage, TMS can adjust inventory depending on the point-of-use requirements.

“From a construction standpoint, when they start working dirt, the materials in that trailer are different from when they get into the piping stage or the electrical stage,” Towles says. “We offer contractors the ability to tailor that inventory around the job phase.”

TMS can generate reports indicating who requisitioned each item, a task that’s often overlooked on construction sites. In many cases, once a tool or part leaves the job trailer, no one tracks where it went, how long it lasted and when it should be replaced.

“The contractor needs documentation on where materials were used and who used it,” Noble says. “Contractors depend on us to help them record what supplies were issued, what cost center to apply it to and other measurements.”

TMS also periodically provides other on-site services for contractors, including respirator cleaning and fit testing, fall protection seminars, hoist and chain inspections, and repairs.

In many cases, TMS can offer the same technical services to the processing plants that hired the contractors. It’s another example of how to leverage knowledge and information within a market niche.

“Everybody is looking at not just trying to get the lowest price, but how to cut costs out of the total distribution channel,” says Legro. “We can all share in the benefits while reducing the overall costs.”